Can You Get a Home Equity Loan with Bad Credit?
Home equity loans are a popular way to fund home improvements, allowing a homeowner to turn equity into cash. But a weak credit score can be a major obstacle to accessing those funds.
Is it possible to get a home equity loan with bad credit?
Yes.
But like most financial experiences, it’s more difficult with lower credit. We spoke with Corey Sayers, VP of Experience at Acorn Finance, to learn about some of the challenges you can expect in your pursuit of a home equity loan, as well as some alternate ways you can get your hands on funds.
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$1,000-50,000
Loan Amount
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8.49-35.99%
APR
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3–7 years
Terms
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560
Minimum Credit Score
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Disclaimer
Personal loans made through Upgrade feature Annual Percentage Rates (APRs) of 8.49%-35.99%. All personal loans have a 1.85% to 9.99% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. Loans feature repayment terms of 24 to 84 months. For example, if you receive a $10,000 loan with a 36-month term and a 17.59% APR (which includes a 13.94% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $341.48. Over the life of the loan, your payments would total $12,293.46. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade's bank partners. Information on Upgrade's bank partners can be found at https://www.upgrade.com/bank-partners/.
What is a credit score?
A credit score is a number intended to predict how likely you are to pay your debts. The number can range from “excellent” to “poor,” according to Equifax. It’s one of several factors that lenders will consider to determine whether you’re eligible for a loan and what terms they can offer you.
The higher your credit score, the less of a “risk” the lender will see. A lower credit score could mean you’ll have a harder time finding a lender, and even if you do, your terms may be less favorable. For example, “because you’re riskier, the bank is probably going to have to give you a higher interest rate on that loan,” Sayers explains. The amount you are eligible to borrow may be lower, too.
Minimum credit score for home equity loans
Important
There’s no official minimum credit score you’ll need to be considered for a home equity loan. Sayers estimates “there may be some lenders out there that would go all the way down to 600 or 620.” This would be considered “fair” per the Equifax categories, well above what they designate as “poor” (300-579).
You can take steps to improve your credit score by:
- Paying down your debts. “It’s all about making on-time, consecutive payments,” Sayers says.
- Using credit cards responsibly. Lenders are wary when your cards are maxed out.
- Using a secured card. This is a type of credit card that you secure with your own cash, usually in the amount of your credit limit. You can use it to make purchases up to that limit and then pay it off, gradually improving your credit score with on-time payments.
Other financial indicators
It’s important to note that your credit score isn’t the only detail a lender will look at; a low score might inspire a deeper look at your financial situation. As Sayers explains, “If you’re walking in with an excellent 800 credit score, it’s indicative that you’re doing some things well,” which can mean less scrutiny of your financial history. “But if you have a poorer credit score, they might put a magnifying glass on a couple things to try to decipher your creditworthiness.”
Debt-to-income ratio
Debt-to-income ratio, or DTI, is the percentage of your monthly income that goes toward paying your debts. The lower your DTI, the more money you have available and the less risk you are to a lender. Ideally, Sayers says, “under 30% is probably where you want to be” if you’re looking to mitigate a low credit score. But lenders might be willing to go to 45% or 50%.
The Consumer Financial Protection Bureau has details on calculating your DTI.
Employment status
Obviously, calculating your debt-to-income ratio requires an income, so active employment is important. More generally, your employment history can be an indicator of your financial stability and your ability to pay back a home equity loan.
“They’re going to look at those factors as well,” Sayers tells us. “Your employment, how long you’ve been employed, and how much income you have.”
Equity
In order to take out a home equity loan, you need to own equity in your home. Let’s briefly review what that means.
If you’ve been making mortgage payments for a long time, you may have equity, which is the percentage of your home’s value you own. If you own a high enough percentage—usually around 20%—you may be able to borrow up to around 80% of that value as a home equity loan. This results in a second mortgage that you will pay down alongside your existing mortgage.
Your credit score won’t affect how much equity you own—that’s yours as you pay your mortgage. However, a lower credit score may affect the terms of the home equity loan you can qualify for or whether you qualify at all.
A home equity loan is only one way to leverage your equity to get cash. Here are three of the most common options.
Home equity loan. This results in a lump sum, which you pay back as a second mortgage.
Home equity line of credit (HELOC). Instead of a lump sum, a HELOC is available to you as a line of credit from which you can borrow as much or as little as you need, even paying it back and borrowing it again. This allows for flexibility if, for example, a home improvement project costs more or less than you expected. You also pay this back as a second mortgage.
Cash-out refinance. Instead of a second mortgage, this is a new mortgage that replaces your previous one with a loan big enough to cover your existing mortgage plus any additional cash you want to borrow.
All three options have the same basic requirements, and none of them is any easier or harder to get with low credit. Sayers describes these options as “choosing the right vehicle” for how you want to receive your funds, but stresses that “they all would have the same considerations if you have a lower credit score.”
You should be especially cautious with a cash-out refinance, since the new mortgage, in its entirety, would be subject to terms dictated by your current credit score. If today’s terms are less favorable than those of your original mortgage, you could end up with your full mortgage debt under a less attractive loan.
One more note: These equity options are all “secured loans.” This means they use your home as collateral. On the plus side, this can save you a few percentage points in your loan’s interest rate. On the downside, you could lose your home if you fail to make your payments.
3 tips for getting a home equity loan with low credit
Low credit is an obstacle to getting a home equity loan, but it’s not an insurmountable one. Sayers has some suggestions that may work in your favor.
1. Shop around
Sayers says you might find willing lenders by pounding the pavement in search of favorable loan terms. “Look around and try your hand at different local banks to see what their standards are.”
2. Get a co-signer
If you know someone with a better credit score who is willing to take responsibility for your debt, they may co-sign the loan with you. This person would be on the hook if you default, so you’d need a lot of mutual trust.
3. Reach out personally to the lender
Banks may seem like impersonal, monolithic businesses (and they often are). But if you have a personal relationship with someone at your local bank, you may be able to plead your case. After all, if you have equity in your home, you must have some history of making regular payments. Sayers mentions that “you might have a better shot with a credit union,” because credit unions often pride themselves on personalized, member-centric service.
Tip
Personal loans: an alternative to home equity options
Personal loans, like the ones you can find through Acorn Finance, can be an attractive alternative to home equity loans, though a lower credit score will still limit your options as far as loan terms. “We have lenders that will lend to credit scores all the way down to 550 or so,” Sayers points out. “And of course, those come with a higher interest rate. But one big advantage is that you’re not in danger of losing your home.”
Personal loans through Acorn Finance are unsecured, so they don’t use your home as collateral. The interest rates will be a few points higher than those of secured loans, but your peace of mind may be worth it. “You have to pay attention to what those rates and terms are and see what might work for you.”
Another personal loan advantage is speed. “With a marketplace like Acorn Finance,” Sayers says, “you can shop around and find options in a matter of minutes.” You’ll be pre-qualified almost instantly for a selection of loans that fit your needs. On the other hand, Sayers mentions, “tapping into your home equity tends to take up to a month.”
Bad credit? Find your funding with Acorn Finance
If your credit score is less than ideal, but you need cash for a project, consider a personal loan through Acorn Finance.
The process is much quicker than a home equity loan. Just enter your needs and instantly select from a list of loans you’re pre-qualified for—many from lenders who are open to working with lower credit scores. Once you’re approved, you can have the cash within days and get started on that important project.
Comparing options on Acorn Finance? See if you prequalify for a personal loan without impacting your credit score.
Just answer a few questions to get personalized rate estimates from multiple lenders.